Economy

So why are gasoline prices going up?

Today oil hit $110 a barrel and the national average cost of regular per gallon reached $3.246.

Now, I’m not an economist; I only play one at S&R. But like most of you in the U.S., I watch those gasoline prices ratchet higher and higher, and I’m ticked off. How come they’re going up so fast? How come they’re so high? And why isn’t someone explaining this to me?

I wish the press would spend more time telling me why prices are climbing. Yes, the press appropriately stresses the consequences of record gasoline prices on those who cannot absorb the increases. But it too often fails to point to the bad guys (we all need someone to blame, right?). Somebody’s gotta take the fall for this, many of us think.

As an S&R colleague said, “As the dollar falls against other currencies, it takes more dollars to buy anything imported unless retailers are willing to eat their margins in order to keep the price steady. Oil is mostly imported.” Does this mean that demand is not driving the increases, but speculation is?

BusinessWeek today provided John Wilen’s excellent explainer. Wrote Mr. Wilen:

The dollar weakened throughout the day Wednesday, setting a number of new lows against the euro and attracting new buyers to the oil market. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the dollar is weak. Many analysts believe the dollar’s decline is the reason crude futures have surged to new records in 12 of the past 13 sessions, despite the fact that crude supplies have risen 10.2 percent since early January. [emphasis added]

Lessee if I’ve got this right. Oil stocks are increasing relative to demand. That means we have supply increasing a tad faster than demand. In my Econ 101 world, that circumstance should drive down oil prices. But they’re going up. BW says that’s caused by speculation: oil futures have become “more attractive to foreign investors when the dollar is weak.”

(Is this where us little people at the end of the price-increase chain begin screaming, “Speculators are screwing us to make money off our pain!”?)

“It’s almost like people are worried they’re going to miss the … train,” said Linda Rafield, senior oil analyst at Platts, the energy research arm of McGraw-Hill Cos., of investors’ dollar driven enthusiasm for oil futures.

So why’s the dollar falling? I’ll leave that for commenters who understand this better than I do. But apparently the Federal Reserve has a role. Says BW:

In part, the dollar is falling in anticipation of another interest rate cut by the Federal Reserve next week. Lower rates tend to weaken the dollar.

Would that the cable and networks news programs do stories beyond the economic pain at the pump, as real as that is. Those stories are easy to do: Take a crew to a gas station, point a camera at someone filling up an SUV or a minivan and paying $80 and ask: “So how do feel about it?”

Instead, I’d like to see more stories that routinely explain the factors that account for increased oil prices at the well head and gasoline prices at the pump. I’d like terms explained, like oil futures and weak dollar and falling dollar. I’d like to know what petrodollars (and petroeuroes?) are and how they influence the U.S. trade deficit. I’d like to know why as trade deficits increase as we buy more oil, the dollar continues to slip.

How about telling us how the Fed’s setting of interest rates affects prices at the pump? How does U.S. policy at home and abroad impact currencies, trade deficits and oil prices?

MSN’s Jim Jubek has a helpful primer that explains some of the relationships and terminology. He wrote it in 2004, so its numbers are dated. But it’s a beginning for those of us dissatisfied with so many drive-by, pain-at-the-pump press accounts of higher gasoline prices. As for those who believe a conspiracy by the oil cabal to screw us lies behind gasoline price increases, please read my September 2006 account of the many factors influencing oil prices.

If what we’re told by the daily press is mostly we hurt because gasoline costs so much instead of why we hurt, then we won’t have the information we need to demand better public and foreign policy.

Now, surely the nation’s journalists have all the training in economics they’ll need to do this. And surely their employers, the corporate-owned media, will spend sufficient money to provide that training …

22 replies »

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  2. As someone who understand this stuff even less well than you, Denny (thank god for the humanities building when I was in college!), I think you’ve done a great job of illustrating how the press could actually help to educate Americans on why things are happening to them.

    And maybe get them to ask some hard questions of an administration who bought all the oil it could for the strategic reserves in order to ratchet up oil prices when they were low. And who now smirks as it thinks of the profits Halliburton and the Carlyle Group are raking in….

  3. Television reporters don’t give in-depth coverage to the gas price issue because it is too hard for them to understand and spell out for dumb Americans in 30 seconds. Remember, TV is not an educational or even an entertainment medium. It is a way to get people to watch advertising. Period. They will do whatever it takes to get people to watch the ads that pay for their inside-the-beltway cocktail parties.

    Here’s another effect of the falling dollar: The housing market is collapsing, but that is only part of the story. Americans’ net worth as compared to the rest of the world is also plummeting due to Bush’s weak dollar strategy. Thats a really frightening story that none of the national news people want to touch.

  4. Hey Doc. Great post. I wonder if you and I aren’t beginning to see eye to eye on this stuff. Most journalists are just badly educated and maybe, just maybe, the best minds don’t go into journalism as much as they should.

    As for training, I think it’s something all journalists should come into the workforce with or learn on their own. I

  5. As the resident (but too often busy) economist, I’ll give you a brief rundown. It may explain.

    Oil is priced in dollars. If the dollar itself declines in value then oil must maintain its relative value. So the price goes up (in dollars). Since the dollar declines against all the major currencies, oil doesn’t rise – in relative terms – against all other currencies.

    Now, as to why the dollar has gone down…

    It’s a bit like saying everyone in school has marbles and you can buy one ice-cream with 10 marbles. What happens if someone (some idiot) adds a few thousand marbles extra to the school’s marble economy? Everyone has more marbles but there are still the same number of ice-creams. So the price of ice-creams goes up and the value of marbles goes down.

    Where’d all the extra dollars come from? Sub-prime crisis. People borrowed money on the “promise” that house prices would continue to rise. House-price borrowings now exceed the value of the houses thus put up as the promise of future gain.

    This would normally mean that the Fed would have to RAISE interest rates in order to soak up the extra cash (high interest rates act like a sponge to soak up too much borrowing that isn’t being paid back or has been made worthless by not delivering on asset growth promises). However, given the weakness of the US economy (job losses, business slowdown) the response from the Fed has been to LOWER interest rates (making more cash available since people borrow more easily).

    Plus, there is also the trillion dollar promise from government to push more cash into the economy to help the poorest keep spending. More cash into the system.

    All of this is driving the dollar’s value relative to other currencies through the floor. Sadly, this means your oil (and gas) are going to keep rising.

    You have a choice here, of course, the Fed could raise interest rates and cause everyone even more economic hardship. Or you deal with that short-term price rise knock and become more efficient.

    Now, try and imagine being Ben Bernanke and having to make this type of Devil’s Alternative choice.

  6. whythawk:

    Thanks for the rundown. Do you have time to comment on the effect of foreign trade deficits on the value of the dollar?

  7. A lot of the increase in the price of a barrel of oil is due to the collapse of the dollar.

    Opec demands payment for oil in Dollars; therefore, other countries must convert their currencies to Dollars to buy oil. Five years ago, the Dollar and the Euro were at parity. $1 equaled 1 Euro. Five years ago the price of oil was $25, or 25 Euro.

    Because of the decline of the Dollar, the Euro is worth $1.56 today. Our cost of oil is $100 a barrel, an increase of 284% in the last five years; however, $100 oil is only 64 Euro, an increase of only 146%.

  8. Thanks to all for their comments.

    JS: I teach freshman newswriting, and from the first day, I tell them this: Learning how to quickly and concisely capture sufficient knowledge about an unfamiliar topic is among the most highly prized of job skills in journalism. Sadly, my freshmen do not demonstrate that too often. To a similar extent, bloggers need the same skill. Here at S&R, Brian and Martin are particularly good at quickly ferreting out needed knowledge to write a sensible post.

    WH: I’m so depressed. But thanks for taking the time to write that. The marbles analogy works well, and I’m stealing it to use in class.

  9. The history of American Society, and indeed most of Western Culture, is to address the symptoms & signs, but never the cause(s).
    If a tree is in your way, hack at the leaves & branches; eventually you’ll give up and accept the tree as a fact of life, or die hacking at the leaves. But don’t dare address the roots – only “radicals” and “crazy” people do that…..

  10. Although I’m not really of sound mind right now, I’d just like to add a comment. All currencies are in decline, but just not all at the same rate. The dollar is going down faster than most other currencies, but they’re all going down as evidenced by the rising commodity prices. Going long oil futures is an easy way to short the dollar without ever undergoing a currency exchange.

    Jeff

  11. JS: The best response to the US trade deficit I’ve read recently was from Warren Buffet during his annual Birkshire Hathaway address to shareholders. Basically, his analysis is this: The Americans have been buying an awfully large amount of stuff from foreigners (oil, toys from China, that sort of thing). You pay in dollars.

    The only thing that foreigners can do with dollars is buy stuff from the US. If the US doesn’t sell enough stuff either they have to keep dollars (not good if the dollar’s value declines) or they have to buy physical assets in the US (like property or companies).

    All those dollars have to come back some time. So a trade deficit is only a short-term thing. In the long-term it HAS to balance.

  12. I have been wondering about something, but can’t quite figure it out. Perhaps the resident economist can comment?

    Shouldn’t the rise in value of the Euro (vis a vis the dollar) somewhat “absorb” the rises in the price of oil (which is denominated and paid for in dollars)? I know it’s not a one-to-one relation and that it’s certainly vastly more complicated than that, but it seems that the rise in prices at the pump (in the eurozone) is almost as though the Euro has remained at constant levels, rather than rising in value against the dollar.

  13. Here’s another analogy

    The US buys goods from China and pays for it in dollars. Now China takes that dollar, and pays US to buy goods from the US. But the goods produced in the US aren’t in demand (for the time being), but the goods produced in China are in demand. Less demand equates to less price which equates to lesser value. So China doesn’t want the dollar anymore, since it can’t buy much stuff from the US. Which means that the demand for dollar drops. So dollar is cheaper than, say the Euro, because China now wants the Euro and is willing to sell goods there, since Europe has stuff to offer China that it values.

  14. okay we need to no the real reason why gas prices are going up. THIS IS JUST A BUNCH OF JUNKKKK!!!!!!!!!!!!!!!!

  15. It’s not Bush it is the government who is causing gas prices to go up!!!!!!!!!!!!!!!!!!!

    Thats all I have to say!!!!!!!!!!!!!!!!!

  16. Today is 9/12/08 and I decided to get some gas around 8:30am. Well good thing because as I was about to put about $25 in my tank I was watching the attendent change the price from $3.99 to $4.69 so I decided to fill my tank. I am sorry that my comment was not very educational but more of a way to vent. These gas prices are out of control. I understand there is a hurricaine but I have never seen gas prices go up $1.25 in under a week.
    Thank you for taking your time to read this.

  17. This is all bullshit; it is a simple fact of gouging which our government has lost all contol over and people are too stupid to boycott these places that gouge and condone it!!

  18. I’m all for boycotting. I think it is ridiculous the price jump 30 or more cents per gallon overnight. I believe it has increased 60 cents per gallon in a month. If the dollar is weaker and it cost the oil company more per barrel, then there should be some negative effect on the oil company profit. I believe the Guardian labeled shell oil profits “obscene”. Exxon posted the greatest profit of several billion dollars. All of the companies report billions in profit.

    I would love to organize a boycott, I just don’t know how. I think maybe by boycotting gas pumps the second Friday of the month following the month gas goes above 2.25 per gallon. For example, gas is 2.59 here in May. It was 2.29 yesterday. It is now 2.59. We boycott 2nd Friday in June.

    Perhaps someone smarter than I am, can make a more educated suggestion?